Examining Bitcoin/Equity Correlations | ETF Trends

In terms of the financial market, bitcoin is not an ancient asset, but its history is still widely studied. One of the main observations about the largest digital currency is that in its early days, it was not intimately correlated to stocks.

There were even times when bitcoin was negatively correlated to stocks. However, this scenario has changed in recent years, leaving bitcoin branded as a risky asset in the process. As a result, it’s no surprise that in a time when stocks are struggling, as it is in 2022, so is bitcoin.

“First, and most obviously, asset classes show increased correlation during times of market volatility and uncertainty. Even the bond market, which generally exhibits a negative correlation with equities, showed an increasing positive correlation throughout 2022. On the other hand, some of the correlation could be attributed to the maturity of the cryptocurrency market. “, noted Alerian analyst Roxanna Islam.

Indeed, bitcoin’s growing correlations with stocks are leaving some investors disappointed, especially in this high inflation environment. Previously, some experts believed that bitcoin would be an ideal tool to fight inflation. However, it is possible that the correlations of the digital asset will decouple in the future.

“With limited data and no established precedent, it is difficult to say what Bitcoin correlations will look like going forward. It is likely that correlations could decouple slightly as markets normalize, but correlations may still remain. high given the maturity of the market,” Islam added. “But a higher correlation to stocks is not necessarily bad, especially since many investors have started using Bitcoin and Bitcoin-related stocks as return amplifier or as part of a broader technology allocation at levels of around 1-5% of their total portfolio. .”

Speaking of correlations, investors can find stocks – so-called crypto-correlated stocks – that are highly sensitive to bitcoin price movements. These include bitcoin miners, companies that are larger bitcoin holders, and other fintech names with crypto inroads.

“Crypto miners also share high correlations with Bitcoin as they derive most of their profits based on the price of Bitcoin mined, but can vary based on how they manage electricity costs and overheads. Correlations for exchanges and banks are still relatively high but lower than other parts of the crypto ecosystem, as their profits also come from volumes, fees and commissions,” Islam concluded.

Investors looking to access large baskets of crypto-correlated stocks can look to exchange-traded funds such as the Invesco Algerian Galaxy Crypto Economy ETF (SATO) and the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF (BLKC).

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